Consultation Paper Amendment to Commission Implementing Regulation (EU) 2016/1646 24 May 2019 | ESMA70-156-864 24 May 2019 ESMA70-156-864 Responding to this paper ESMA invites comments on all matters in this paper and in particular on the specific questions summarised in Annex 1. Comments are most helpful if they: 1. respond to the question stated; 2. indicate the specific question to which the comment relates; 3. contain a clear rationale; and 4. describe any alternatives ESMA should consider. ESMA will consider all comments received by 5 July 2019. All contributions should be submitted online at www.esma.europa.eu under the heading ‘Your input - Consultations’. Publication of responses All contributions received will be published following the close of the consultation, unless you request otherwise. Please clearly and prominently indicate in your submission any part you do not wish to be publicly disclosed. A standard confidentiality statement in an email message will not be treated as a request for non-disclosure. A confidential response may be requested from us in accordance with ESMA’s rules on access to documents. We may consult you if we receive such a request. Any decision we make not to disclose the response is reviewable by ESMA’s Board of Appeal and the European Ombudsman. Data protection Information on data protection can be found at www.esma.europa.eu under the heading Legal Notice. Who should read this paper All interested stakeholders are invited to respond to this consultation paper. This consultation paper is primarily of interest to trading venues and indices providers but responses are also sought from any other market participant which might be impacted by the proposals contained in this document including investment firms, trade associations and industry bodies, as well as institutional and retail investors. ESMA • CS 60747 – 103 rue de Grenelle • 75345 Paris Cedex 07 • France • Tel. +33 (0) 1 58 36 43 21 • www.esma.europa.eu 2 Table of Contents 1 Executive Summary ....................................................................................................... 5 2 Introduction .................................................................................................................... 6 3 Main indices ................................................................................................................... 7 3.1 Background information .......................................................................................... 7 3.2 Methodologies to determine the list of main indices and related data analysis ........ 7 3.2.1 The current methodology (Option A) ................................................................ 7 3.2.2 Assessment of the approach provided in the Benchmark Regulation and new methodology (Option B) .................................................................................................. 8 3.2.3 Data analysis of the methodologies considered (Options A and B) ..................11 3.3 ESMA proposal ......................................................................................................29 4 Recognised Exchanges .................................................................................................31 5 Annexes ........................................................................................................................33 5.1 Annex I – Cost benefit analysis ..............................................................................33 5.1.1 Questions for the final CBA .............................................................................33 5.1.2 High-level CBA ................................................................................................37 5.2 Annex II - Summary of questions ............................................................................41 5.3 Annex III - Draft technical standards .......................................................................46 5.4 Annex IV – CRR Framework ..................................................................................57 5.4.1 Introduction to the capital requirements ...........................................................57 5.4.2 Approaches, methods and techniques to calculate the capital requirements ...57 5.4.3 The use of collateral for capital requirements purposes ...................................59 5.4.4 The use of collateral for the purpose of counterparty credit risk .......................60 5.5 Annex V – Data analysis ........................................................................................62 5.5.1 Background information ..................................................................................62 5.5.2 Data sources and performance of the tests .....................................................69 5.5.3 Detailed results of the analysis for each option ................................................70 3 Acronyms used BCBS Basel Committee on Banking Supervision BR Regulation (EU) 2016/1011 of the European Parliament and the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds and amending Directives 2008/48/EC and 2014/17/EU and Regulation (EU) No 596/2014 CA Competent Authority CP Consultation Paper CRD IV Directive 2013/36/EU of the European Parliament and the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC CRM Credit Risk Mitigation Framework CRR Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 ESMA European Securities and Markets Authority FCP Funded Credit Protection ITS Implementing Technical Standard LGD Loss Given Default MiFID I Directive 2004/39 of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments amending Council Directive 85/611/EC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC MIFID II Directive 2014/65/EU of the European Parliament and the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU OFCP Other Funded Credit Protection OJ Official Journal PD Probability of Default UFCP Unfunded Credit Protection 4 1 Executive Summary Reasons for publication Commission Implementing Regulation (EU) 2016/1646 (ITS 2016/1646) specifies the main indices and recognised exchanges pursuant to paragraph 8 of Article 197 of the Capital Requirements Regulation (EU) 575/2013 (CRR). In this context, ESMA considers it necessary to introduce amendments to the ITS to ensure that the most updated list of main indices and recognised exchanges is incorporated in the legislative text. This consultation paper (CP) explains ESMA’s proposal. Stakeholders are invited to provide feedback on this proposal. The input from stakeholders will help ESMA to finalise its proposed amendments to the ITS. Contents Section 2 introduces the purpose of the ITS on main indices and recognised exchanges in the context of the CRR requirements. Section 3 focuses on main indices. Section 3.2.1 details the current approach for the selection of main indices. Section 3.2.2 provides details of the alternative methodologies evaluated by ESMA for the selection of main indices. Section 3.2.3 provides the analysis of the indices that would qualify as main indices under all methodologies. Section 3.3 describes ESMA’s proposal. Section 4 describes the approach to identify recognised exchanges and includes proposed amendments to Annex II of the ITS 2016/1646. Next Steps On the basis of the responses received to this CP, ESMA will finalise a draft ITS amending ITS 2016/1646 and submit a final report to the European Commission for endorsement. 5 2 Introduction 5. The CRR entered into force on 1 January 2014 with the aim to minimise the effects of credit institutions and investment firms ("institutions") failing, by ensuring that they hold enough financial resources to cover the risks associated with their business. An important element of this is prescribing the way in which organisations should treat the credit risk of assets for which they have taken collateral. The CRR's definition of when securities can be eligible as collateral refers to equities and convertible bonds that are constituents of a "main index" and to debt securities that are listed on a "recognised exchange". 6. Paragraph 8 of Article 197 of the CRR requires ESMA to specify "main index" and "recognised exchange", as follows: "8. ESMA shall develop draft implementing technical standards to specify the following: the main indices referred to in point (f) of paragraph 1 of this Article, in point (a) of Article 198(1), in Article 224(1) and (4), and in point (e) of Article 299(2); the recognised exchanges referred to in point (a) of paragraph 4 of this Article, in point (a) of Article 198(1), in Article 224(1) and (4), in point (e) of Article 299(2), in point (k) of Article 400(2), in point (e) of Article 416(3), in point (c) of Article 428(1), and in point 12 of Annex III in accordance with the conditions laid down in point (72) of Article 4(1). ESMA shall submit those draft implementing technical standards to the Commission by 31 December 2014." 7. On 19 December 2014